Wednesday, March 12, 2008

Executive Pay: What is Not Said

"You have to listen to not only what is being said, but what is not said -- which is often more important than what they say." — Kofi Annan

There may be daily updates on this issue because I am reading, daily, misreporting of executive pay. This time, it's the Washington Post and it's about what was not said.

Capital One Chief Was Paid $17 Million in 2007
Capital One, the McLean credit card issuer, awarded chairman and chief executive Richard D. Fairbank a pay package it said was worth $17 million last year, almost entirely stock options. That compares with a package worth $18 million in 2006, the company said. Fairbank last year exercised stock options at a gain of $54.8 million, the company said. That sounds heroic, a CEO just getting paid from gains received by shareholders.

They got the "awarded" part right. Of course the $17 million number is likely a significant understatement of the value of those options but that has been in this blog before and will be again, but not right now.

The problem here is what was not said. It is true that he had a gain of $54.8 million on options. But as the media continues to miss the significant change in executive equity compensation packages, this reporter missed a little $18.3 million vesting event on restricted shares, understating pay by about 25%.

Now, there is another complexity here. A footnote indicates that:

"Values reported for Stock Awards are related to the vesting of Mr. Fairbank’s performance shares on March 31, 2007, delivery of which are deferred until the end of Mr. Fairbank’s employment with the Company. Therefore, Mr. Fairbank neither acquired any shares nor realized any value from such shares in 2007." Not true. If someone gives me $18 million in stock but I've told them to just hang onto it until I retire, it is difficult for me to argue that I didn't "realize any value" from that. That is a tax technicality.

This further highlights not only the complexity of executive pay but the need to understand both the tabular disclosures and the voluminous footnotes. And the accounting, the tax, and the other technical nuances.

What was not said here is important: When Capital One's stock price was flat for two or three years their interest turned to giving executives free shares of restricted stock. Now that the stock has lost half its value, how attractive those stock options look again so the executives can participate in the rebound. Flat price, guaranteed pay. Low price, guaranteed participation in the rebound. (See previous posts on Washington Mutual for the popularity of this approach.)

That's the real story, Washington Post. With your reputation for investigative journalism, how about spending a little more time on the shenanigans going on in the financial services industry right now. We are seeing various combinations of fraud, failure, and folly and even the least serious of those is an important corporate governance issue. Directors are paid to prevent folly, and not be a part of it.

Friday, March 07, 2008

New Issue of The Compensation Committee Adviser

Beware the Compensation Headlines: Apples and Oranges

I have often said that when one reads an article about executive compensation in any of the leading business publications – the Wall Street Journal, Business Week, Forbes – one should assume that the pay amounts cited are incorrect. While they are not always incorrect,...

To keep reading, click here:

Those Darn Compensation Consultants

"Mortgage mess CEOs defend pay" -
"Countrywide's Mozilo resisted pay cuts" -
"Wall Street Executives Defend Pay at House Hearing" -

In all of the media coverage today, perhaps the most interesting tidbit was not what was said in the hearings but what was learned from some email messages in the course of the investigation. Beyond the left-vs.-right debate, the accusations and justifications, and the election-year posturing, there's this:

"The report says two compensation consultants hired in recent years urged the board to cut back on certain aspects of Mr. Mozilo's compensation. The first...advised Countrywide in 2004 when it was discussing an extension of Mr. Mozilo's contract.

"A second 2006 recommended reductions in Mr. Mozilo's compensation, the report says. After the board's compensation committee proposed making those cuts, the report says, Countrywide management hired another consulting firm, Towers Perrin, to review the board's proposal. Though the firm was being paid by Countrywide, Mr. Mozilo regarded the Towers Perrin his own adviser, emails reviewed by the committee staff suggest.

"'The board made a number of revisions to accommodate Mr. Mozilo and (the consultant)," the report says. Among other things, the board put larger companies into the peer group used to gauge Mr. Mozilo's pay and gave him a $10 million bonus to stay on as CEO longer than planned.
The report cites an email (from the consultant) to Mr. Mozilo expressing disappointment that the board's final proposal "lowers your maximum opportunity significantly."

"According to the report, Mr. Mozilo replied: "At this stage in my life...this process is no longer about money but more about respect and acknowledgement of my accomplishments.... Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions...'."


The consultant expressed "disappointment" at the Board's actions. Wow.

(There was a fourth consulting firm involved as Countrywide's consultant to the Board Committee which is mentioned in their most recent proxy statement.)

"Lawmakers have argued that these consultants are merely getting paid to tell the board and CEO what it wants to hear." -

Apparently the Board was told by two, maybe three, different consultants that Mr. Mozilo's pay was too high. The Company even incurred the additional expense to file an amendment to its proxy statement with nice charts showing how Mr. Mozilo's pay was going to be lower under his new contract than under this old one.

Why does this really matter? Because a few companies with questionable pay practices end up in a Congressional hearing, which then leads to legislation regarding executive pay. That legislation is typically ill-conceived, fails to achieve its objective, and creates additional cost and constraints for all of the other companies. Like Sarbanes-Oxley, a law reacting to a few big companies' missteps penalizes thousands of smaller companies who have done nothing wrong. And that has a negative impact on American businesses, their employees, and our economy. I suppose in an election year I should claim that my position is "patriotic" but it's also one shared by many investors and even some other compensation consultants.

Who ever thought compensation consultants could have such an impact?

Disclosure: I am a shareholder of both Washington Mutual and Countrywide Financial but do not believe my financial interest in those companies influences the opinions expressed here. I do believe, however, that executive compensation practices directly impact shareholder value. I suppose I also should disclose that I once worked for Towers Perrin but never worked for the three other firms cited in the news today.

Wednesday, March 05, 2008

A Week Late but Never a Dollar Short, in Fact...

A Week Late but Never a Dollar Short, in Fact...
Fred Whittlesey
Compensation Venture Group, Inc.

The U.S. House of Representatives Committee on Oversight and Government Reform will hold a hearing titled, “Executive Compensation II: CEO Pay and the Mortgage Crisis” on Friday, March 7, at 10:00 a.m.

I hope it's on CSpan, even though I have never watched CSpan. But if I wanted to start watching a Congressional hearing at 7:00am Pacific Time, which I probably wouldn't, I'd know that my government is providing such access. These things are always archived on the web for later viewing anyway. No doubt YouTube will have it although I am concerned that explicit discussion of executive compensation could violate their obscenity standards.

The list of those testifying can be viewed here and a little background on the topic here. In the hearings will be CEOs and Chairs of Compensation Committees from Merrill Lynch, Citigroup, and Countrywide. I would add one more to the list but couldn't find a link allowing such suggestions other than the "contact us" link on the Committee's website and who knows who actually reads those.

Because it seems that while they're on the topic of the mortgage crisis they wouldn't want to exclude Washington Mutual, here in Seattle our local poster child for the mortgage crisis, destruction of shareholder value, and continued delivery of lucrative compensation to those responsible for the crisis and destruction. While other banks fired their CEOs, triggering big payouts, WaMu doesn't require them to be fired in order to continue receiving high levels of compensation unrelated to performance. Read on.

The furor had barely died down over the last SEC filing disclosing WaMu's equity compensation grants to executives - hidden beneath the misleading headline suggesting that the CEO had given up his bonus for the year. This, by the way, raised the question of why he should have been getting a bonus in such a disastrous year. The answer: That's how the plan operated - we did the calculations and despite the clear disaster, the plan didn't seem to think it was a total disaster.

Which leads right into the latest controversy with Monday's filing: The 2008 bonus plan pays the executives a bonus if certain parts of the income statement are positive, even if the company loses money. Worse, the plan will allow the Compensation Committee to subjectively override any formulaic outcomes. And, those overrides could be up or down.

And, that subjective discretion costs WaMu shareholders because that renders the plan - which is not a plan but just a fancy discretionary bonus - nondeductible for tax purposes. At the target amounts disclosed that could cost WaMu shareholders about $3 million in lost tax benefits. But I suppose that's not "material" for a company, and management team, that destroyed about $25 billion dollars in shareholder value last year.

And, I could tell you a lot more about the corporate governance issues reflected in these plan designs but I won't. Let's just say that on our firm's Compensation Integrity scoring system that has a scale of 1 to 100, we're exploring how to accommodate negative numbers because we wouldn't want to exclude any companies due to system limitations.

Monday, February 25, 2008

Look Who's Coming to Dinner..or maybe a late continental breakfast

Look Who's Coming to Dinner..or maybe a late continental breakfast
Fred Whittlesey
Compensation Venture Group, Inc.

After the last entry "Change is Possible" - check this out:

Committee to Hold Hearing on CEO Pay and the Mortgage Crisis

The Committee on Oversight and Government Reform will hold a hearing titled, “Executive Compensation II: CEO Pay and the Mortgage Crisis” on Thursday morning, February 28, 2008, in 2154 Rayburn House Office Building.

The hearing will examine the compensation and retirement packages granted to the CEOs of three corporations deeply involved in the current mortgage crisis. This will be the Committee’s second hearing on executive compensation practices. On December 5, 2007, the Committee examined the role of compensation consultants in determining CEO pay.

Note that one of those "three corporations" happens to be Countrywide Financial.

I am no fan of government intervention (and not much of a fan of government in general) but this is very interesting and should make for some great executive pay drama on C-Span. Like the cast of "Guess Who's Coming to Dinner" the list of "witnesses" is an all-star cast. (Boy, doesn't "witnesses" make it sound like a criminal trial? - Yes, your honor, I DID SEE him exercise those stock options.) The who's who of highly-paid executives, people who approve the pay for highly-paid executives, and people who don't really like highly-paid executives should make for an interesting broadcast which likely is the real objective of the Committee. In an election year. Pardon my cynicism.

I hope they're serving some nice coffee and pastries at this hearing because these executives are accustomed to quite a nice set of perks, which won't be detailed here because I'm not interested in inflaming the issue. But it is fun to read last year's proxy statements and see the details of their perks. Before they got fired.

Not to diminish the quote of Neil Armstrong, but this hearing is yet another small step for executive pay awareness but probably no giant leap for executive pay reform. Because the latter will require some big changes in how Compensation Committees, compensation consultants, and management teams interact. And so far those changes are about as far along as civil rights were in 1967, the year "Guess Who's Coming to Dinner" won an Academy Award. Yes, we already had the Civil Rights Act of 1964. But we know all about the time lag between ceremony and legislation and real change.

As Tillie said, "Civil rights is one thing. This here is somethin' else." Yes, high pay for executives is one thing, but what we'll hear about is this hearing is indeed somethin' else.

Sunday, January 27, 2008

Change is Possible

Change is Possible
Fred Whittlesey
Compensation Venture Group, Inc.

Just a quick update. I've included the links so that you can view the original story.

13 January 2008
Los Angeles Times
For CEOs, Failure Can Be Lucrative

"This is another clear example of pay for failure," said Fred Whittlesey, principal consultant with Compensation Venture Group in Seattle. "How many more examples of this will we have to see before this gets fixed?"

"Every year, there's more talk about boards getting tough," said Whittlesey, who is a Countrywide shareholder. "But every year, they keep saying yes to these contracts."

14 days later...

27 January 2008
Countrywide CEO Mozilo Will Give Up $37.5 Million in Severance Benefits

"Countrywide Financial Corp. CEO Angelo Mozilo, under fire over the size of his potential payout from the proposed sale of his troubled mortgage company, says he is forfeiting some $37.5 million in severance pay, fees and perks he was scheduled to receive upon his retirement. 'I believe this decision is the right thing to do as Countrywide works toward the successful completion of the merger with Bank of America,' Mozilo said in the prepared statement."

And then there's this one...

23 January 2008
Seattle Times
Wamu Leaders to Profit Even if Stock Stays Low

"That rationale was condemned as "outrageous" by Fred Whittlesey of Compensation Venture Group, a Seattle-based executive-compensation consulting firm. All shareholders should hit the roof when they see what they've done here," said Whittlesey, himself a WaMu stockholder. They've created another layer of poor compensation policy on top of the existing poor compensation policy. Rather than setting the options' strike price at Tuesday's closing price of $14.77, Whittlesey said, WaMu's board should have set it at $40 — the stock's approximate price before last year's swoon. One of the things you don't do with stock options is give them to people who drove the shares down so they can profit by bringing them back up," he said.

Let's watch the headlines.